The world is facing a coronavirus debt timebomb as countries borrow trillions of pounds to fight the pandemic, former Bank of England Governor Mervyn King has warned.
Lord King, who led the Bank through the global financial crisis of 2008-9 before stepping down in 2013, said companies and countries alike could be sunk by the weight of their new loans – potentially triggering another meltdown that would snuff out any recovery.
The crossbench peer told the Telegraph’‘s Planet Normal podcast, which you can listen to on the audio player above, that the virus had struck a global economy made vulnerable by already high levels of borrowing.
He said: “I think the immediate concern facing us over the next few years is that the very high levels of debt we entered the Covid-19 crisis with are going to be exacerbated by even higher levels of debt.
“So I think we can expect to see many defaults over the next few years as businesses struggle and many governments in various parts of the world will also struggle to repay their debts. So I think defaults could be the trigger of another financial crisis down the road.”
The Bank’s current chief Andrew Bailey – himself a protege of the former Governor – has insisted that UK banks are strong enough to both survive the crisis and maintain lending through the outbreak after strengthening their reserves since the taxpayer bailouts of 2008.
But Lord King said banks in Europe and China are “very fragile”, and warned that it is “always risky to say it’s safe”. He added: “What seem to be initially small losses can easily multiply and expand”.
He said: “I think banks are going to realise they will experience significant losses, not so much on the loans they’ve made since the Covid-19 crisis became evident, but on the pre-existing loans that looked very safe when they were made, but now look a lot more dubious given the challenges facing many businesses, through no fault of their own, that have arisen as a result of Covid-19 and the responses governments have made to it.”
The peer’s comments follow warnings from lobby group TheCityUK in May that UK companies may be shouldering as much as £105bn of unsustainable debt – including up to £20bn of loans issued through the Treasury’s taxpayer-backed coronavirus business interruption loans scheme.
Bank of England officials warned last year about so-called leveraged loans given out to risky companies across the world, with then-Governor Mark Carney saying the $14 trillion (£11.3 trillion) market had “all the hallmarks” of the subprime mortgage bubble that triggered the financial crisis.
Lord King, a supporter of Brexit, added that the euro was another source of potential crisis unless member countries commit to full fiscal union.
He said: “Unless they take that route financial markets will always be dubious that the euro will be guaranteed to hold together, and therefore there could emerge new sovereign debt crises down the road.”
Lord King also took aim at central banks around the world for making a “serious error” by responding to the crisis with a major expansion of money printing, which he warned “isn’t the answer to every cause of slower economic growth”.